Chapter 4: The Great Pizza concpet of component kitting

On the first week of December, 2007 the Bintan factory was conducting its annual stock take. The finance folks had set aside three days to complete this event. I could imagine there must be quite a huge amount of inventory in the factory.

Since I can’t be going to the Bintan factory and trouble the production folks who were concentrating on the year-end stock take exercise, I stayed in Chai Chee, the Singapore site. I wanted to know how the factory is performing. In my mind, the on-time delivery is one of the best measures of the health of the factory operations.

I walked over to Lily Lim’s office. I knocked in and asked, “Hi Lily, this is my second week in Honeywell. I need to understand the on-time delivery (abbreviation OTD) performance of this factory.”

“You are welcome on board Honeywell. We are looking forward to you to help us to do a miracle job. Our OTD is very poor. It stands at 21% last week. It has been hovering between 20% and 30% for several months,” said Lily.

“Pardon me. The OTD performance has been hovering between 20% and 30%? That is real bad. What do you think is the root cause of the poor OTD performance?” I asked.

Lily explained, “A single vendor who failed to deliver on-time is all it takes to kills our OTD performance. This vendor is called, AMC. It is situated just next door to our factory at Bintan. Proximity does not help at all.”

“How does AMC delivers the parts to us? Can you describe to me in detail?’ I asked.

“Parts delivered by AMC are all in full kit called ‘Pizza’. It is akin to when you give a call to Pizza hut to request for a home delivery, your complete order for Pizza plus side orders will be delivered to you in one hour’s time. However, for whatever reason, the ‘Pizza’ delivery often was late because of shortage of one or several components. That kills the whole spirit of on-time delivery for the ‘Pizza’ program,” explained Lily.

“Wait a minute. What is exactly in a ‘Pizza’?” I prodded.

Lily explained, “The ‘Pizza’ comes in ESD-shielded box. It contains the full kit of materials required to build a product less the CCA’s (a different name for printed circuit board assembly). When you open the ‘Pizza’ box, you will see 3 to 5 red ESD bags. Each ESD bag contains all the component parts that go into the assembly of a section of the product. Most products require 3 sections. Some products require up to 5 sections.

In each ESD bag, there is a chassis or front panel or back cover or a power supply, knobs, switches and several small little plastic bags of different type of screws and fasteners.

Even if there is a mere shortage of one screw, AMC could not deliver a complete ‘Pizza’. Without the missing screw, we cannot assembly the complete product. This is what caused the poor OTD performance and it has been so for years. AMC never seem to be able to improve the situation.”

In my mind, I almost can tell exactly what the root cause of the poor delivery by AMC is. But I prodded further, “By the way, how do we get started with AMC as our vendor of choice and onto such a creative ‘Pizza’concept that I had never heard of before?”

Lily explained, “For more than 10 years, AMC has been our reliable supplier of CCA’s. We were very please with AMC for many years. It was our top-rated supplier in terms of on-time delivery.

Several years ago, the management here was forced to drive down the level of inventory. Holding excessive inventory is very costly. This happens to every company, anyway.

This management thought of a simple idea. If we were to push the inventory to AMC, our factory inventory will show a very much lower figure. We shall report a very much lower inventory number. That will solve our inventory reduction goal.

Almost overnight, AMC became our stockist for all other component parts right down to screws and fasteners. Subsequently, this management came out with a more brilliant idea. Since AMC is holding all our materials at its location, why not we get AMC to do the kitting of components as well?

AMC was forced to take on the role to carry out component kitting for us. Thereby, we developed this idea into ‘Pizza’ where each ‘Pizza’ contains all the parts required to build each product.

In addition, we push AMC a step further to kit the component parts in accordance to different sections. As each section of the product is assembled, only the exact quantity of all the component parts needed is packed in one ESD bag.”

“Who came out with this ‘brilliant’ idea?” I asked. In my mind, this guy must be a dreamer and the whole thing is not practical at all.

Lily explained, “You know our boss, Samuel loves this idea very much. If AMC can deliver all the ‘Pizza’ on-time, we will achieve 100% OTD every week. Our inventory level is almost close to perfect; near zero inventory level.

Our final assembly work station will not be cluttered and free of unwanted components parts. They too, need not worry for part shortages. AMC assures that.”

“Thank you Lily. You have describe d to me the development of the great ‘Pizza’ concept of component kitting and how AMC evolved from a CCA vendor to a stockist and now a component kitting vendor. All, three-in-one,” I said.

Some time in mid-April I met up with Joshua Pascoe, director human resources. He asked me, “Jim Gibbs had decided to replace AMC with another vendor. What do you think?”

I replied, “No. That is a bad idea. No doubt, it is a common practice to switch vendors for a dime in price reduction or simply, to axe a poor performing vendor. But in this case, switching vendor from AMC to another vendor is akin to making another new vendor wastes all its resources trying its best to deliver on-time and yet it will certainly fail without knowing the reason why.

I am not interested in price reduction. That is the job of the commodity manager. I tell you why I said it is a bad idea to switch vendor.”

“Great. I like to hear your idea. Perhaps, switching vendors is not a good strategy,” said Joshua..

“AMC originally was a supplier of CCA’s only. This is its core strength. Somehow, for an easy way out to reduce inventory, this management ‘cleverly’ pushed the inventory to AMC and made AMC a stockist. Of course, Honeywell has to pay a (high) price for it. Nobody does a favor for free.

Then the great idea of ‘Pizza’ concept of component kitting came in. This requires AMC to hire hundreds of workers to do nothing but to kit the components into plastic bags. Can you imagine the amount of work required to kit 2 screws in one small plastic bag, 3 fasteners in another small plastic bag and etc. The time wasted in kitting these small little bags of component parts in the exact quantity called for in the Bill of Materials, section by section is huge.

Who pays for all these? Honeywell does, of course. This is money down the drain. Samuel, Jim Gibbs and Neal Speranzo do not care spending for this kind of money. To make themselves look good by reporting annual inventory turns of 14 times, who cares if Honeywell is paying lots of good money to AMC to hold huge amount of inventory on their behalf. By the way, in their mind, this is ‘Other People’s Money’. Spend it.

But a much bigger, nightmarish problem is the kitting process is so difficult to coordinate that almost at any one time, there is going to be one or a few parts not kitting in time to make up to a complete ‘Pizza’. Perhaps, my guess is wrong. I had not been to AMC factory. It is closely guarded and almost none of us can go into their factory floor without special clearance.

But come on, I just have to ask what is their core skills. In today world of supply chain, nobody can be good at everything; producing CCA’s (which we are already asking them to make more than 100 different types of CCA’s), be a stockist to manage our inventory and to kit the component parts for us.

Samuel and his superiors dreamed to have a wonderful vendor who can do all these for us. And they actually did it by throwing all these roles to AMC. How not to fail?

We are over-loading AMC to do things that they are not good at. How can AMC deliver on-time all the time?”

“I agreed with you. What do you suggest, Eric” said Joshua.

“Step one. Pull back the screws and fasteners and we manage this inventory ourselves,” I explained, “This will leave AMC to assemble the CCA’s and perhaps, still keeping some of the B-items for us. This will send a strong signal that deliver two messages to AMC.

One, we acknowledge AMC had failed our great ‘Pizza’ concept of component kitting. We remove the component kitting process from them. With that, they have to retire hundreds of workers who were hired to do component kitting.

Two, AMC will begin to realize if it does not buckle up and assure 100% on-time delivery, we will remove the inventory of B-items from them. In other words, their revenue will shrink once again.

Of course, I have no intention to replace AMC with another vendor to assembly the CCA’s for us. They had been a reliable vendor for CCA’s for many years.

But this is easier said than done. To move the screws and fasteners back to our factory shop floor we must adopt a concept generally called, dock-to-WIP. The vendors must deliver the screws and fasteners directly to the point-of-use at the shop floor without passing through the stock room. This is a big lean project.

Unless management agreed to take back the management of screws and fasteners, the OTD will remains at 20% to 30%. At best, it may achieve 50%. You can kiss the goal of 90% and above, goodbye and forever.”

“Thank you Eric. The information shared with me is really interesting. But we have to adjourn for lunch. The rest of the folks are waiting for us,” said Joshua.

Deep in my mind, it is not easy to bring back the screws and fasteners to our factory.

First, I must conduct a motion study on the final assembly process. Two months later, I invited Lim Siow Kiat to video-tape a complete cycle of the final assembly process at Kansas line #3. He analyzed the final assembly motions in detail, grouped them into 9 major categories and made an analysis on these categories before making recommendation of the solutions. A cool, 11% of the time recorded was the result of opening up the small little bags of screws and fasteners.

Figure 4-1: Motion study of a final assembly process

To eliminate the double-handling of screws and fasteners, screws and fasteners must be self-contained at the final assembly work station. The final assembly operators must manage the inventory of these screws and fasteners. But this is not going to happen just yet. The commodity manager is not convinced this is the direction to go.

May 20, 2008 John Zeneski was in Singapore. I made John watched a 1 and a ? hour video clip on the final assembly process that was filmed by Lim Siow Kiat. I asked him to analyze the video clip closely to identify a breakthrough in reducing the cycle time of the final assembly process.

I told him, “Apart from the burn-in process which takes 20 hours, the next longest cycle time is the final assembly process. In other words, a reduction in the cycle time for the final assembly process automatically means a higher production capacity for the entire production cell.

But the most significant benefit is AMC’s delivery performance will jump up by leaps and bounds. Our OTD performance shall then have a chance to break away from the perennial dead-lock at well below 50% to close to 95% level. This is the kind of improvement that I am looking for and not the 11% improvement in productivity. We must get our focus right.”

An hour and a half later, John completed viewing the video clip. I pulled my chair along side John and picked on a segment of the video clip and made John view it again.

I asked, “How do you go about carrying out Kaizen on the final assembly process? Observe careful each process step. I want you to think about the macro-strategy what shall be the theme for Kaizen. Ignore the micro-level improvement opportunities.”

Throughout the next one hour, John made several suggestions. Each of them was about a specific micro-level Kaizen opportunity.

I then explained, “John, essentially, the final assembly process can be broken up into two main categories of motions. One, the first group is assembly-related processes. Two, the second group is soldering-related processes. Actually, there are two separate themes for Kaizen.

Imagine the final assembly workstation is virtually partitioned into two halves.

One half shall be dedicated to the manual assembly processes. All the component parts and fastening tools, jigs and fixtures shall be placed around this half of the workstation for proximity.

The other half shall be dedicated to the soldering processes. All the equipment, tools and soldering materials or accessories must be placed around this half of the workstation for proximity.”

John nodded his head, “Eric, you are very sharp and you are truly a sinseh-grade mentor. I am very impressed. Kaizen to me is just continuous improvements. Kaizen when it is carried out by you is so focused and to top it all it comes with a good theme. You are several cuts above me.”

However, at the time of writing, Samuel is not interested in any lean project. He just wants everybody to focus on clearing the backlogs. Perhaps, in his mind, he does not want anyone to remove his buffer mentality.

He has been using AMC to buffer against the need for him to carry the inventory. A strategy that he had put in place a few years ago and most probably, he was handsomely rewarded for doing a ‘miraculous’ reduction in the factory inventory.

Did anyone asked the price to pay to get AMC to hold the excessive inventory for Honeywell?